DP16306 Cross-sectional uncertainty and the business cycle: evidence from 40 years of options data
|Author(s):||Ian Dew-Becker, Stefano W Giglio|
|Publication Date:||June 2021|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16306|
This paper presents a novel and unique measure of cross-sectional uncertainty constructed from stock options on individual firms. Cross-sectional uncertainty varied little between 1980 and 1995, and subsequently had three distinct peaks â?? during the tech boom, the financial crisis, and the coronavirus epidemic. Cross-sectional un- certainty has had a mixed relationship with overall economic activity, and aggregate uncertainty is much more powerful for forecasting aggregate growth. The data and moments can be used to calibrate and test structural models of the effects of uncertainty shocks. In international data, we find similar dynamics and a strong common factor in cross-sectional uncertainty.